Apollo shares look reasonably priced, based on the firm's strong 2010 profit of about $3 a share, but those earnings are unlikely to be duplicated this year because they were driven by a 41% rise in the value of the firm's private-equity funds, which produced huge incentive fees. Private-equity firms generally collect 20% of any profit on investments they manage. These incentive fees totaled $1.6 billion last year, 76% of Apollo's revenue, compared with a negative $796 million in 2008, when the firm lost money.

Our guess is that analysts will project about $2 a share in profit for 2011 once coverage begins in two months because they will assume that Apollo will have lower—but still-sizable—investment gains this year.

A cheaper play on Apollo is the little-known AP Alternative Investments, which is lightly traded in Europe (AAA.Netherlands). That $1.7 billion fund invests alongside many Apollo funds. It trades at $11, a sizable discount to its reported net asset value of $18.85.

Apollo's pluses include $67.6 billion in managed assets, as of Dec. 31—including $39 billion in private-equity funds—and a strong performance history. Those funds have generated average annual returns of 26% since the firm's inception in 1990. Apollo, however, is earning base management fees on only $47 billion of assets, reflecting complex agreements with investors like the California Public Employees' Retirement System.

In an investor presentation available on retailroadshow.com, Black calls Apollo "a firm for all seasons" and boasts that it came out of the financial crisis "in better shape than any of our peers and poised for incredible growth." He probably also is happy because his 92 million shares will be worth $1.7 billion after the IPO. Apollo did make a great investment last year in chemical maker
LyondellBaselllyb 0.03418024381907257%LyondellBasell Industries N.V. Cl AU.S.: NYSEUSD87.8
0.030.03418024381907257%
/Date(1427835749780-0500)/
Volume (Delayed 15m)
:
2725466AFTER HOURSUSD87.8
%
Volume (Delayed 15m)
:
40233
P/E Ratio
10.941218986379553Market Cap
41866025903.0252
Dividend Yield
3.1890660592255125% Rev. per Employee
3481530More quote details and news »lybinYour ValueYour ChangeShort position
(LYB) as it emerged from bankruptcy. Its $1.5 billion stake is now worth over $6 billion.

Apollo's negatives include some large and still-troubled investments in companies like Harrah's Entertainment, Realogy and Claire's Stores, which are carried in its funds at Apollo's own estimates. These companies are highly leveraged and losing money, making their value very uncertain. Harrah's (now called Caesars) tried to go public in late 2010, but investors balked at the deal.

Apollo's base management fees of $431 million haven't risen much since 2008, when they totaled $384 million. Without incentive fees, Apollo probably won't earn much. The firm, whose offices are in one of Manhattan's fanciest addresses, 9 W. 57th St., has about 500 employees, including 171 expensive investment pros.

The firm's results are volatile. It made $1.2 billion of economic net income in 2010, up from $542 million in 2009 and a loss of $333 million in 2008, a result of investment write-downs. Tangible book value is just $4.00 a share. And as a partnership, Apollo pays a low tax rate (although Congress has threatened to raise the rate.)

The Bottom Line

Apollo's earnings can be volatile. Some investors might prefer the steadier results of firms like T. Rowe Price or BlackRock.

Apollo has been inactive in a supposed specialty: traditional private-equity deals. Its largest since 2008 was the $1 billion buyout last year of CKE Restaurants, parent of Hardee's. Apollo's reputation for aggressiveness may turn off corporate boards. An Apollo-controlled company pulled out of a deal to buy Huntsman, a chemical company, in 2008. That prompted a lawsuit from Huntsman and led founder Jon Huntsman to say that he was "outraged" by the conduct of Black and other Apollo executives. Apollo got lucky when Huntsman settled that suit for $1 billion.

The firm's junk-bond and distressed-asset funds were helped by the Fed's zero-percent interest-rate policy. Bond investing is one of Apollo's strengths, but junk and distressed debt look fully priced. Moreover, the private-equity business is sitting on huge amounts of uncommitted capital, which is intensifying competition for deals. Apollo has $10 billion of committed capital—"dry powder," in industry parlance. If that money isn't invested, it ultimately must be returned to investors. Many don't know that Apollo and its peers typically get a base fee, even if committed capital isn't invested.

Bottom line: The IPO should sail ahead, but there probably are better asset-management plays than Apollo.